The Incentive to Supply Bad Ideas

The CBPP notices what may be a new trend:

Yet another state has proposed raising taxes on low-income residents to pay for new corporate tax breaks. Leading lawmakers in Missouri want to eliminate a property tax credit for low- and moderate-income seniors and people with disabilities in order to help finance new tax credits for businesses.

Sadly, swaps like this are increasingly common; both Michigan and Wisconsin have cut low-income programs this year to pay for business tax breaks.

The Missouri proposal, which the legislature will consider in a special session that begins today, would make renters ineligible for the state’s property tax “circuitbreaker” credit. Landlords generally pass along a large share of their property taxes to tenants in the form of higher rents; the circuitbreaker credit helps offset those higher rents for more than 100,000 low-income and disabled Missouri residents. … Some 29 states offer property tax circuitbreakers or similar programs.

Killing this tax credit would raise taxes on some of Missouri’s most vulnerable residents by up to $750 a year. It would also hurt local retailers and other businesses, since low-income people are among those most likely to spend every dollar they have. That’s not a smart deal for Missouri.

It used to be that policymakers would try to shift income from higher to lower income individuals based upon the idea that the lower savings rate at lower incomes would stimulate demand (i.e. the MPC is higher at lower incomes, so transferring income in this way increases consumption). That is a demand-side argument.

But with the victory of the supply-siders and the shift in the argument to incentives, the idea is that we need to encourage firms to build more buildings, buy more trucks, start more businesses, etc. Never mind that we are in a recession and corporations are already sitting on more funds that they care to spend, and that the current state of demand won’t support such expenditures, if we give a tax cut to businesses or the rich they’ll be oh so very motivated to go out and supply more stuff.

But who will buy it?

The supply-side, trickle down argument from the GOP goes beyond the rich:

…Sen. Jim DeMint (R-S.C.) told CNN yesterday that he’s visited with a lot of business people lately, and he’s learned they’re “actually afraid to hire people” because they’re “afraid of what the government will do to them.”

That’s awfully dumb — when Republicans find evidence of government punishing employers for hiring workers, they should let everyone know — but it was the next part of the interview that really stood out.

“I have talked to a lot of businesses in South Carolina who can’t get employees to come back to work because they are getting unemployment and they’re getting food stamps and they say, ‘Call me when unemployment runs out.’ […]

“There are a lot of people who desperately need it and we need to make sure that we have that safety net in place, but we also have to realize there are a lot of people gaming the system right now.”

I’m not sure which of DeMint’s talking points were supposed to believe — are employers afraid to hire or are they struggling with lazy people who won’t apply for openings? — but the rhetoric is a reminder that Republicans just don’t seem to like the unemployed.

In DeMint’s mind, the jobless are living it up on meager unemployed benefits, and don’t want to seek gainful employment.

Thus, instead of arguing that giving money to the unemployed helps to stimulate demand, and thereby boost sales and employment, the supply-sider’s argument is that it makes the unemployed lazy. So we should take away all of that money and give it to the rich who, of course, deserve and earn every penny they get and will run out and invest it in new business ventures no matter how depressed the economy might be. It has nothing to do with the incentive to do what’s best for the rich and powerful, it’s what’s best for the people whose programs get cut to fund these tax cuts for wealthy indiviuals and businesses.

So they do not favor more progressive taxes. The flatter the tax code, the better. However, a more progressive tax system makes people happier:

The way some people talk, you’d think that a flat tax system—in which everyone pays at the same rate regardless of income—would make citizens feel better than more progressive taxation, where wealthier people are taxed at higher rates. Indeed, the U.S. has been diminishing progressivity of its tax structure for decades.

But a new study comparing 54 nations found that flattening the tax risks flattening social wellbeing as well. “The more progressive the tax policy is, the happier the citizens are,” says University of Virginia psychologist Shigehiro Oishi… Oishi conducted the study with Ulrich Schimmack of the University of Toronto at Mississauga and Ed Diener, also at University of Illinois and the Gallup Organization. … That happiness, Oishi says, was “explained by a greater degree of satisfaction with the public goods, such as housing, education, and public transportation.”

There is a qualification that how the taxes are spent appears to matter, more spending in and of itself isn’t necessarily the key to happiness, but spending on the right things appears to make a difference.

There is a compromise position, spending that has supply-side effects in the long-run, but stimulates demand in the short-run. That is the idea behind stimulus spending as opposed to, say, giving income transfers of the same amount. We get an immediate boost to demand as goods and services are purchased to build the project, people are hired and spend their income, etc., and we get a long-run impact on the supply-side. And with interest rates so low, and the need for infrastructure so great, it’s a pretty good (sure?) bet that the present value of the benefits from these projects exceeds the cost.

So what are we waiting for?

About Mark Thoma 243 Articles

Affiliation: University of Oregon

Mark Thoma is a member of the Economics Department at the University of Oregon. He joined the UO faculty in 1987 and served as head of the Economics Department for five years. His research examines the effects that changes in monetary policy have on inflation, output, unemployment, interest rates and other macroeconomic variables with a focus on asymmetries in the response of these variables to policy changes, and on changes in the relationship between policy and the economy over time. He has also conducted research in other areas such as the relationship between the political party in power, and macroeconomic outcomes and using macroeconomic tools to predict transportation flows. He received his doctorate from Washington State University.

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